The 2022 Policy Outlook After a Disappointing April

The PBOC has abruptly shifted policy messaging in April, and disappointed markets by failing to deliver a cut to the MLF rate despite transparently weak credit demand throughout China’s economy. For the rest of the year, fiscal policy support via a budget revision may be necessary, but interest rates still need to move lower, and the PBOC will be dragged into cuts sooner or later. More troubling is the mixed messaging from Chinese policymakers, which is damaging confidence in a meaningful policy response to counter the lockdown and property-led economic slowdown.

Posted April 24, 2022
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Q1 2022 China Macro Data Recap

Headline real GDP growth reportedly accelerated to 4.8% y/y in Q1 from 4.0% in Q4 last year. However, given the deepening slowdown in the property sector and COVID-related restrictions on activity, there are few plausible explanations for faster economic growth early this year. Lockdowns will exact a rising economic cost in the months ahead, while credit growth and credit demand remain tepid, reducing financing available for new investment. Caution in monetary easing raises the need for additional fiscal policy support, which may require a rare mid-year budget revision.

Posted April 18, 2022
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This is No Way to Cut Rates

The PBOC reportedly guided most commercial banks to reduce deposit rates by 10 bps on Friday, and also formally announced a smaller-than-expected 25 bps cut to banks’ required reserve ratios (RRR), while leaving the medium-term lending facility (MLF) interest rate unchanged this morning.

The combination of monetary policy moves is disappointing relative to expectations and misses an opportunity to send a stronger easing signal, reduce real corporate borrowing costs, and boost credit demand. Further monetary easing is still highly necessary, but less probable after today’s adjustments. This creates further downside risks for credit growth and cyclical momentum this year, within an already flagging economy.

Posted April 16, 2022
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